Banks escape from mortgage fraud lawsuit

Virginia investors who claim they were defrauded into buying overpriced real estate in coastal Carolina have lost their bid to sue seven banks in their federal mortgage fraud lawsuit.

In a 36-page memorandum order, U.S. District Judge Gerald Bruce Lee last month dismissed the banks from the consolidated action where 127 plaintiffs accuse developers of artificially inflating the appraised value of undeveloped land in North and South Carolina.

A key basis for dismissal was the strict pleading standards under the recent Twombly and Iqbal cases. The plaintiffs’ allegations failed to show the banks were knowingly involved in the activities of promoter Total Realty Management, according to Lee. “To the extent that Plaintiffs have essentially alleged that the banks … were in cahoots with TRM, as the basis for liability these allegations are simply implausible,” Lee wrote.

The case has been described as “a real estate version of the Madoff scandal” by one plaintiffs’ lawyer quoted in a published report.

According to claims in the case, scores of investors, most from Virginia, were tricked into buying undeveloped land with little or no upfront cash on the promise of big profits on resale. The deal allegedly was carried out by a now-bankrupt Virginia company called Total Realty Management.